DeepSeek’s market disruption must awaken India

‘The Indian IT sector, which has long thrived on cost-effective labour-led service models, now faces a reality where AI can easily replace repetitive, low-value tasks that were once its competitive advantage’ 
| Photo Credit: Reuters

DeepSeek, a Chinese company, has shaken up the global tech industry and stock markets with its low-cost artificial intelligence (AI) model. This breakthrough has forced critics to reconsider China’s position vis-à-vis the United States in the race to advancement and dominance in AI and computational capabilities. DeepSeek’s innovation has caught the attention of not just policymakers but also business leaders such as Mark Zuckerberg, who opened war rooms for engineers after DeepSeek’s success and who are now eager to understand its formula for disruption. So what DeepSeek, which is originally not a core AI firm but a financial trading company, has essentially done is to create generative AI models that perform on a par with the current leader, OpenAI’s ChatGPT, while requiring significantly lower costs for development and operations.

Placing China at an advantage

How does DeepSeek’s Innovation affect India’s dominance in IT? The core of DeepSeek’s success lies in its ability to overcome the limitations of expensive computational power, giving it a significant cost advantage over competitors worldwide.

This disruption is reminiscent of India’s long-standing dominance in the global information technology (IT) sector, which has been built on its competitive edge through an abundant supply of skilled, English-speaking, and cost-effective labour. However, with generative AI eliminating both skill and language barriers, DeepSeek’s innovation has accelerated the rise of cheaper, more efficient alternatives that can replace low-cost IT service providers at an accelerated pace, posing a serious threat to India’s IT dominance.

DeepSeek’s breakthrough not only strengthens China’s position in AI but also opens the door for broader advancements in IT services through AI-driven automation. The Indian IT sector, which has long thrived on cost-effective labour-led service models, now faces a reality where AI can easily replace repetitive, low-value tasks that were once its competitive advantage. DeepSeek’s success signals that Indian IT giants have fallen behind their Chinese counterparts in this new era of technological competition and innovation.

What can organisations learn from DeepSeek? The biggest lesson DeepSeek offers to Indian IT giants is the power of research and development (R&D). DeepSeek treated AI product development as a “sidekick” rather than a core activity, yet this investment in innovation has paid off tremendously. This highlights the importance of utilising surplus capital as well as idle resources, both capital and human, towards R&D rather than merely optimising workforce efficiency.

Companies should foster an environment that encourages research, experimentation, and a tolerance for failure. Instead of focusing solely on delivering immediate business objectives, organisations must cultivate a culture that goes beyond routine deliverables. DeepSeek’s approach of treating AI development as a secondary initiative reflects its willingness to take risks without expecting guaranteed returns. By normalising failure as part of the innovation process, it has created a foundation for groundbreaking advancements.

For Indian IT firms, the takeaway is clear: investing in R&D, even as a secondary pursuit, can lead to game-changing breakthroughs. The key is to build an ecosystem that values long-term innovation over short-term optimisation.

Future priorities for India

India lags behind in R&D investment, a critical factor for sustaining long-term economic competitiveness. India’s gross domestic expenditure on R&D (GERD) remains below 1% of GDP, far lower than that of other major economies, including China.

According to UNESCO Institute for Statistics (UIS) data, China invested around 2.43% of its GDP in R&D as of 2021, underscoring India’s need for urgent policy intervention in boosting domestic R&D in cutting-edge technologies such as AI. A key issue is the lack of investment in advanced research, particularly in hiring top talent, including PhDs, who are essential for driving innovation.

One major policy misstep has been the persistent debate over whether to prioritise manufacturing or services. This false dichotomy overlooks the strong linkages between the two sectors. Manufacturing and services complement each other and thrive together. Instead of choosing one over the other, India must adopt a balanced approach that fosters growth in both areas.

India’s dominance in IT is now under threat. The focus should shift toward building a workforce that enhances productivity through AI rather than being replaced by it. Traditional comparative advantages such as cheap labour and English proficiency are no longer sufficient in the global AI-driven economy. Instead, India must recognise and retain its high-skilled domestic talent to ensure innovation happens within the country rather than abroad.

Focus on quantum technology

As a top priority for the future, India must ensure it does not fall behind in the next major technological frontier, which is the quantum computing race. Advancements in quantum technology will be crucial for maintaining technological leadership in the coming decades. To stay competitive, the government and private sector must significantly increase investments in R&D, particularly in quantum computing alongside AI, and actively recruit top researchers to drive breakthroughs in this field.

Gopal Krishna Roy is Assistant Professor of Economics, Madras School of Economics, Chennai